I.R.S. Told To Explain Tax-Exempt Refusals

By DAVID CAY JOHNSTON

Published: December 5, 2003

In a decision with significance for preventing charity frauds, a federal appeals court has ruled that the Internal Revenue Service must disclose its reasoning each time it denies a request for tax-exempt status or revokes it.

The decision came in a lawsuit brought by Tax Analysts, the nonprofit publisher of Tax Notes magazine, which sought information on the reasons for denials and revocations of tax-exempt status. The ruling, by the United States Court of Appeals for the District of Columbia Circuit, applies to all tax-exempt organizations, from pension plans to fraternal lodges, but it is expected to be of most interest to charities. While the I.R.S. must disclose its reasoning, the unanimous three-judge panel held that the name of the organization and the individuals involved could be kept confidential.

Even without names, however, the detail in large numbers of disclosures will be valuable in showing patterns in decision-making by the I.R.S. and in what it perceives as abusive proposals by would-be nonprofits.

A lawyer for Tax Analysts, William A. Dobrovir, said that because of the ruling ''when some organization loses its tax exemption, you will now know why.''

The editor of The Chronicle of Philanthropy, Stacy Palmer, said that neither ''the public nor nonprofits know why the I.R.S. makes its decisions, and now we will have this important information at a time when we have all these scams going on in the nonprofit world.''

Putnam Barber, president of the Evergreen State Society, a Seattle group that fosters policies to promote confidence in nonprofit groups, said disclosure was ''a good idea both from point of view of watchdogging the I.R.S. itself and in helping people understand what exempt status should reflect.''

The decision was issued Tuesday and reported yesterday in Tax Notes. The appeals court held that Congress ''had spoken directly to the precise question at issue'' and that the I.R.S. regulations keeping the reasoning for denials and revocations secret contradicted Congressional directives.

The 1998 I.R.S. Restructuring and Reform Act ordered a Congressional study of disclosure practices. It found no basis for the secrecy and recommended that Congress enact a law overturning the regulations. That prompted Tax Analysts to seek disclosure and to file suit when its request was denied. Previous lawsuits by Tax Analysts, dating to 1974, have forced disclosure of private letter rulings and other documents that shed light on how the I.R.S. administers the tax laws.

The I.R.S., noting that it was within the period when it may decide to appeal, declined to comment.